How I would start my next startup in Germany without a GmbH (2020)

There are 3 problems with the structure he describes:

(1) In the early days, you might find yourself being a 1-person business, with that 1 person living in Germany and all the business partners you might end up interacting with in real life would be in Germany (especially banks, regulators, etc.) In that situation, it's a bad look if you make your business partners contract with your Delaware C-Corp. It's an even worse look from the angle of money laundering prevention, which is going to be the primary point of view of the bank that you're trying to get an account from, the accountant you're trying to hire, etc. etc.

(2) A P.O. box in Delaware will not be enough to convince German tax authorities not to tax your Delaware C-Corp. They will want to see that your Delaware C-Corp has an actual office with actual people in Delaware, before they give any level of credence to the notion that they shouldn't just tax your Delaware C-Corp as a German GmbH/AG-like entity. If you're already at the stage where you have people contracting for you who actually are in the U.S., maybe you can get away with that. If you're just one or two people in Germany and a P.O.-box in Delaware that won't fly. I tried doing that in Austria where the relevant laws are basically the same, and the court wanted to send an emissary fom the chamber of commerce to visit my supposed office in Delaware. Now, even if you do clear that hurdle, Germany will still try to tax profits that your Delware C-Corp generates in Germany. But how do you determine that number? By doing accounting, based on German accounting standards of course. -- So now the clusterfck really starts to unravel, once you have an actual American wanting to invest in that vehicle, when you've never done accounting the way you were supposed to, from their point of view.

(3) German law recognizes the "Scheingeschäft" [1] and "Umgehung" which is a situation where two people draw up a legal contract that differs from the way they truly arrange their business in real life. E.g. Buyer buys house from seller. They draw up a sales contract for the house for $1M and a contract wherein buyer gives a gift of $1M to seller. They tax $1M as a sale of a house and $1M as a gift, which might come to less than the sale of a house for $2M. German law says that such an arrangement is null and void, and the contract should be treated as if they had contracted to sell a house for $2M in the first place. -- This same theory applies to more complicated situations involving businesses etc. So German law might look at your Delaware C-corp as basically just concealing what is in real life a German GmbH, and might start treating your Delaware C-corp as if it actually was a German GmbH. -- Now you have German law and Delaware law looking at the same legal structure in entirely different an incompatible ways. That's a total nightmare.

SOLUTION: You'd have to add at least a third layer below your Delaware C-Corp, which is a GmbH that actually does business in Germany.

You'd need:

- Max Mayer GmbH, a holding which serves as Max Mayer's alter ego.

- Startup Inc, a Cayman corporation 100% owned by Max Mayer GmbH.

- Startup GmbH, a German Gmbh 100% owned by Startup Inc with a provision in the partnership agreement that says something like: Startup GmbH must return 100% of all profits in excess of $1M to Startup Inc.

Now, for the early part of your growth curve, Y-Combinator wouldn't be involved, and you wouldn't earn $1M: Startup GmbH is now the only thing that matters. Your business partners won't much care who owns the entity they interact with (except for purposes of money laundering prevention, but the only thing they care about is that Max Mayer ultimately owns the whole thing not about what goes in between). The situation of Startup Inc from the pov of German law would still be precarious but it wouldn't really matter. It would have no revenue, no costs, no bank account, nothing, so it wouldn't be something that tax authorities would much care about.

When Y-Combinator comes along, you'd sell them shares in Startup Inc.

When Startup GmbH starts making more than 1M, then Startup Inc will start to handle money for the first time. At that point it becomes a relevant entity from the point of view of tax authorities, banks etc. But also: At that point there's a lot of money involved, you might have actual people and a physical presences across the globe, etc. so you'd just be like any other trustworthy multinational. (As opposed to like a hustler with big plans and nothing to show for it).

When Startup Inc start generating capital gains, they'd go to Max Mayer GmbH where they're initially tax-free (until they're actually returned by Max Mayer GmbH to Max Mayer).

But that's a pretty complicated setup! It may be what you'll wish you had done when your revenue actually takes off and/or investors want to start throwing money at you. But it'll be more expensive and cumbersome in terms of administrative overhead than if you had just done one GmbH and left the complicated bits for later. Remember: Most startups fail. Most Y-Combinator applicants do not get in. So it's not necessarily good advice to broadly give to people to always go for that structure from the outset.

[1] https://de.wikipedia.org/wiki/Scheingesch%C3%A4ft